Should drug makers that break the law be required to pay an extra penalty that would be used to fund the National Institutes of Health?

Sen. Elizabeth Warren (D-Ma.) believes this notion would not only provide needed money for medical research, but would help persuade drug makers to curtail bad behavior. So last month she introduced a bill, called the Medical Innovation Act, which she has described as the equivalent of a pharmaceutical swear jar.

Basically, drug makers that reach settlements with the federal government for paying kickbacks to doctors, defrauding Medicare or Medicaid, or illegally marketing medicines would have to pay 1% of annual net profits for each blockbuster medicine that originated with government-funded research. However, the law would only apply to drug makers with more than $1 billion in net profit. In the past, about 20 drug makers met this threshold each year.

The U.S. Department of Health and Human Services would be chartered with calculating payments, which would actually run for five years. Why? This is the same amount of time covering most settlements reached between drug makers and the Department of Justice.

No estimates were given on how much money might be raised for the NIH, but if the law had been in place five years ago, Warren claims the NIH would have gained an extra 20% in annual funding, or roughly $6 billion, on average, each year. This is real money.

“We should make it easier for the biggest drug companies to help develop the next generation of cures, and harder for them to profit from breaking the law and defrauding taxpayers,” she told a conference last month. The payments, she noted, would be in addition to any settlement paid by a drug maker. And she went out of her way to insist this would not be a tax.

Not surprisingly, though, the pharmaceutical industry is having none of it. The trade group representing large drug makers, the Pharmaceutical Research & Manufacturers of America, quickly slammed the proposal, calling it “misguided” and suggesting that needed money would be “siphoned” from research that develops new medicines.

Some also argue that Warren wrongly inflates the NIH role in creating drugs. She “should acknowledge the reality rather than trying to score political points that don’t match up with the facts,” says Peter Pitts, a former FDA associate commissioner for external affairs, who now does policy consulting for the pharmaceutical industry.

Meanwhile, the amount of money the bill may generate is a question mark, since this depends on the number of settlements. But Pat Burns of Taxpayers Against Fraud, a nonprofit funded by attorneys who represent pharmaceutical industry whistleblowers, says that numerous cases are under way involving large drug makers.

Drug makers are already grumbling that device makers are exempt, because the bill focuses on companies that sell blockbuster drugs. But in fact, any company that sells both products could be subject to a penalty. And sources maintain that many more medicines than devices can be readily traced to government-funded research.

The real issue, though, is that the pharmaceutical industry is expected to fight back, and this may prove to be a sizeable obstacle.

“This is a very powerful lobby,” says Paul Thacker, a fellow at the Safra Ethics Center at Harvard University and former aide to U.S. Sen. Chuck Grassley (R-Iowa), who led investigations of drug and device makers. “We need more medical research funding, but I think she needs to make a case that these violations lead to poor outcomes that increase health costs. A swear jar sounds great, but this is going to be a tough.”

AstraZeneca has agreed to pay the federal government $7.9 million to settle allegations the drug maker paid kickbacks to a large pharmacy benefits manager to ensure that its blockbuster Nexium heartburn medication was given the best status on formularies, which are the list of drugs that received preferred coverage.

In exchange for maintaining “sole and exclusive” status, AstraZeneca allegedly provided discounts to Medco Health Services, which was bought by Express Scripts, on other drugs, such as Prilosec, another heartburn medication and Toprol, a blood pressure drug.

As a result, the feds say this arrangement violated federal anti-kickback laws and prompted false or fraudulent claims to be submitted to the Retiree Drug Subsidy Program, a program administered by the U.S. Center for Medicare & Medicaid Services.

An AstraZeneca spokeswoman sends us a note to say the drug maker denies the allegations. “It is in the best interest of the company to resolve these matters and to move forward with our business of discovering and developing important, life-changing medicines, while avoiding the delay, uncertainty and expense of protracted litigation,” she writes us.

A spokesman for Express Scripts, which purchased Medco nearly three years ago, declined to comment .

The allegations were initially made in a whistleblower lawsuit filed in 2010 by two former AstraZeneca employees – Paul DiMattia, a former executive director of commercial operations, and F. Folger Tuggle, who had been a managed markets account director in charge of the Medco account, according to court documents.

In 2004, for instance, they alleged the drug maker agreed to offer Medco a 10% discount, which they calculated was worth about $100 million, in return for preferred formulary status. As a result, AstraZeneca “fraudulently disguised” the best price that was to have been offered to federal government programs, such as Medicaid, that purchase the drug, according to their lawsuit.

The former execs also alleged that, by entering into this arrangement with Medco, AstraZeneca violated a corporate integrity agreement that was signed in connection with a 2003 settlement to resolve civil and criminal charges for illegally promoting a cancer medicine. However, the statement from the U.S. Department of Justice does not mention any violation. We asked the Office of Inspector General of the U.S. Health & Human Services for comment and will pass along any reply.

The settlement is rather small compared with the $3.6 billion in revenue that Nexium generated last year and the sometimes sizeable payouts made by drug makers to resolve allegations over kickbacks to physicians or illegal marketing. Still, the case is interesting if only because it pulls back the curtain a wee bit on interactions with pharmacy benefit managers, or PBMs.

PBMs play a behind-the-scenes but crucial role in the pharmaceutical world. They negotiate contracts for prescription drug coverage on behalf of insurers, companies, unions and government agencies, among others. Consequently, they can wield enormous clout for both consumers and drug makers.

Recently, PBMs have become more noticeable thanks to the sparring over prices for hepatitis C treatments. Express Scripts, in fact, prompted a price war this winter between Gilead Sciences and AbbVie over their treatments.

And so, another working week is coming to a close. Not a moment too soon, yes? This is, as you know, our treasured signal to daydream about weekend plans. Our agenda is rather modest, we must confess. As always, we hope to catch up on our reading and napping. And, of course, we plan to spend some time with Mrs. Pharmalot and one of those ever-busy short people. We may shop for some interesting tea leaves, however. But what about you? Besides keeping warm and cozy, will you connect with someone special? How about seeing a picture show? Or you could simply plan the rest of your life. Well, whatever you do, have a grand time, but be safe. See you soon…

Arkansas Medicaid officials have reached a legal settlement to resolve claims the state denied patients an expensive cystic fibrosis therapy made by Vertex Pharmaceuticals because of its cost, The Wall Street Journal reports. In a lawsuit filed last year, three patients alleged the state violated their civil rights by denying them the drug, Kalydeco, which has an annual wholesale price of $311,000. Vertex declined to provide the drug free to the patients through its patient assistance program, which the drug maker claimed might have encouraged other states to limit patient access.

Shire was accused of tax avoidance by the U.K.’s Public Accounts Committee as part of its report into the role played by PricewaterhouseCoopers in helping its clients avoid paying tax, London Southeast writes. Evidence was submitted regarding arrangements put in place by PwC on behalf of Shire involving the incorporation of an entity in Luxembourg. Only two people to cover the seven Shire companies incorporated there and they are responsible for managing intra-company loans of around $10 billion, which Shire used to shift profits to Luxembourg.

U.S. authorities have filed a criminal charge alleging a Chicago physician took kickbacks from Teva Pharmaceutical to prescribe clozapine — known as a risky drug of last resort — to patients in his care, The Chicago Tribune reports. The criminal charge could also signal a settlement in a pending civil case brought by the U.S. attorney’s office that alleged Michael Reinstein received illegal kickbacks from pharmaceutical companies and submitted more than 140,000 false Medicare and Medicaid claims.

Sanofi plans to name a new chief executive before the end of the first quarter, says chairman Serge Weinberg, who has been acting CEO since Chris Viehbacher was fired in October for poorly executing strategy and a lack of communication with the board, says Reuters.

Two Roche experimental drugs for Parkinson’s disease caused lung toxicity in monkeys, researchers said, delivering a setback to one of the most promising pathways to a new type of treatment, Bloomberg News writes.

GlaxoSmithKline shares rose to the highest in six months after the drug maker reported positive results from a trial combining two cancer drugs being sold to Novartis, an outcome that triggers a $1.5 billion payment from the Swiss company, LiveMint says.

A U.S. judge is urging transvaginal mesh device makers and the women suing them to work harder to resolve their tens of thousands of lawsuits in one of the biggest U.S. mass torts in history, Reuters informs us.

The price for Dendreon, the bankrupt developer of a drug to treat advanced prostate cancer, rose more than one-third to $400 million before an auction has even been held, according to Bloomberg News.

More than 50 side effect cases that some parents and doctors in Canada are attributing to the Gardasil HPV vaccine, which is sold by Merck, were examined by The Toronto Star.

Wockhardt says it has resolved compliance issues at its Morton Grove facility in the U.S. for which it received a Form 483 inspection report from the FDA, according to DNAIndia.

Cigna chose Gilead Sciences’ Harvoni as its preferred treatment for hepatitis C over AbbVie’s Viekira Pak, after negotiating a discount with Gilead, according to Reuters.

Seeking to replenish funding for new scientific research, U.S. Sen. Elizabeth Warren (D-Ma.) plans to introduce a bill next week that would require drug makers that break the law to send some of their profits to the U.S. National Institutes of Health.

Drug makers that reach settlements with the federal government for paying kickbacks to doctors, defrauding Medicare or Medicaid or illegally marketing medicines would have to pay 1% of their annual profits for each blockbuster medicine that can be traced to public sector research. Such a penalty would run for five years, which Warren notes is the same amount of time covered under most settlements.

In her view, the pharmaceutical industry has benefited from the largesse of publicly funded research, which has often allowed drug makers to profit from basic science that sometimes yielded big-selling medicines. Yet most every large drug maker – and some smaller ones – has reached settlements with the feds in recent years and paid fines, but have otherwise not been penalized.

Warren argues that if her Medical Innovation Act had been in place over the past five years, the NIH would have had an extra $6 billion annually to fund research grants, which she claimed would have represented a 20% increase in NIH funding. To capture research funding, she wants to create the equivalent of a pharmaceutical “swear jar.”

“Between these two problems – shrinking government support for research and increased rule-breaking by companies that have blockbuster drugs – lies a solution: requiring those big-time drug companies that break the law to put more money into funding medical research,” Warren said earlier today in prepared remarks given at the Families USA Health Action Conference in Washington, D.C.

“We should make it easier for the biggest drug companies to help develop the next generation of cures – and harder for them to profit from breaking the law and defrauding taxpayers. Only the biggest and most successful pharmaceutical companies would be required to reinvest in NIH,” she said. “No small or medium-sized innovator would ever pay…This isn’t a tax. It is simply a condition of settling to avoid a trial in a major case of wrongdoing. If a company never breaks the law, it will never pay the fee.”

To what extent her Medical Innovation Act will gain traction is unclear, but a trade group for the pharmaceutical industry took umbrage. For one, the Pharmaceutical Research & Manufacturers of America maintains that its members invested more than $50 billion in R&D in 2013 and more than $500 billion since 2000, which it says represents the “vast majority” of all pharmaceutical R&D spending.

“Pursuing misguided policies that siphon funding from the groundbreaking medical research happening in the biopharmaceutical industry will have devastating consequences for patients and society,” says a PhRMA spokesman. “The proposed legislation would result in fewer medicines for patients and lost jobs at a time when our economy can least afford it.”

But the Warren proposal was met with cheers elsewhere. Patrick Burns of Taxpayers Against Fraud, a non-profit that advocates against stiffer penalties against drug makers and is partially funded by attorneys, says the NIH could benefit from her bill, because the fines currently paid by drug makers go to the U.S. Treasury, instead of specific earmarked destinations.

“Senator Warren thinks pharma fraudsters should pay more she’s right about that,” he says. “The current system of penalties is a perversion. If you are a big Fortune 500 company, no one loses their job, no one goes to jail and no one pays a personal fine… If we can change that equation, we may be able to start to put the era of big fraud behind us. Bigger fines alone are a good idea, but it’s not a game changer.”

Daiichi Sankyo agreed to pay $39 million to the U.S. federal government and state Medicaid programs to settle allegations of paying kickbacks to physicians to prescribe several of its drugs. The agreement, which is the latest in a string of such deals in recent years involving drug makers, stems from a lawsuit filed under whistleblower provisions of the False Claims Act by a former Daiichi Sankyo sales rep.

As part of the settlement, Daiichi Sankyo also agreed to a corporate integrity agreement, which stipulates that the drug maker must implement compliance programs to prevent such illegal practices from occurring in the future. These sorts of agreements have become common in the pharmaceutical industry as the feds have pursued such charges in hopes of cracking down on illegal marketing.

In court documents, the government charged that Daiichi initiated different speaker programs and paid doctors kickbacks – in the form of honoraria and meals, among other things – that were labeled as speaking fees between 2004 and 2011. The speaker programs, however, were problematic, according to the U.S. Department of Justice.

How so? The feds allege that some physicians spoke only to his or her own office staff; the audience sometimes included the physician’s spouse; payments were made to physicians even when participants took turns “speaking” about duplicative topics at dinners paid for by the drug maker; and the dinners were lavish and, sometimes, exceeded internal Daiichi cost limitations of $140 a person, according to the settlement agreement.

In a statement, Ken Keller, who heads Daiichi Sankyo commercial operations in the U.S., says “we are pleased to have finalized these agreements and remain focused on our core mission of helping people live healthy and meaningful lives. We are committed to being an ethical, trusted and respected company, and constantly improving how we operate is part of our culture.”

The drugs that physicians were encouraged to prescribe included the Welchol cholesterol-lowering medication and the Benicar, Azor and Tribenzor high blood pressure pills, according to the feds. The sales rep, Kathleen Fragoules, is expected to receive $6.1 million of the settlement money, before legal fees are subtracted.

A pair of lawmakers has introduced identical bills in the House and Senate that would require generic drug makers to pay additional rebates to state Medicaid programs for any medicine that increases in price faster than the inflation rate.

The move follows a hearing last week into recent spikes in prices for some generic drugs that was held by U.S. Sen. Bernie Sanders (I-Vt.). Along with U.S. Rep. Elijah Cummings (D-Md.), he is conducting an investigation into generic pricing and they introduced the bills (here are the House and Senate versions).

During the third quarter of this year, 37% of all generics sold through retail pharmacies increased more than they did in the previous quarter, according to an analysis by Pembroke Consulting. In a small minority of cases, the prices for certain generic drugs have risen over the past year by as much as 1,000% or more.

In a statement, the lawmakers said their legislation would help save Medicaid an estimated $500 million over the next 10 years, citing Congressional Budget Office data. This is a portion of savings that could be generated by various programs to bolster Medicaid rebates, according to Congressional sources.

“Brand-name drugs are required to pay this rebate if their drugs go up faster than inflation, but generic drug companies are exempt,” Sanders said in a statement. “Congress should fix this loophole immediately.”

The hearing generated considerable interest, given that generic drugs are so widely used – about 86% of all prescriptions filled are for generics, according to the IMS Institute of Healthcare Informatics – at a time of rising health care costs.

But executives from three generic drug makers who were asked to testify – Teva Pharmaceuticals, Lannet and Marathon Pharmaceuticals – did not appear. However, an industry trade group, the Generic Pharmaceutical Association, did take exception to some pricing data that Sanders cited.

In a statement, the trade groups argued Sanders relied, in part, on numbers that have “limited usefulness in drawing conclusions about the costs to government purchasers,” because he cited retail pharmacy costs, which are not “representative of costs negotiated” by government programs.

“Unfortunately, the newly proposed legislation makes it clear that the hearing was not intended to be meaningful examination of ways to ensure savings,” says Ralph Neas, who heads the trade group, in a statement. “The proposed bill reflects a basic misunderstanding of the pharmaceutical marketplace, and attempts to impose brand pharmaceutical provisions on generic drugs. This effort is misguided and will threaten patient access to affordable medicines.”

To what extent either piece of legislation makes any headway remains to be seen, especially since significant turnover is about to occur in Congress. And both lawmakers are soon to be in the minority. Nonetheless, rising drug costs is a flashpoint issue that is likely to continue to resonate.

A pair of drug makers has settled allegations that they caused state Medicaid programs to overpay for their medicines.

In one case, the Organon unit of Merck agreed to pay $31 million to several states for allegedly failing to include discounts in its pricing. The federal Medicaid Drug Rebate Program requires that all drug makers provide Medicaid programs with the best available price, which is a means of ensuring that state agencies do not overpay for medicines.

Organon also allegedly offered kickbacks to nursing home pharmacies to encourage use of the Remeron antidepressant. The drug maker also allegedly promoted the medicine for uses not approved by the FDA. The marketing included targeting children and teenagers, according to a statement from New York Attorney General Eric Schneiderman.

Merck did not admit to any wrongdoing, a Merck spokeswoman writes us. She adds that the allegations occurred before Organon was controlled by Merck. In 2007, Organon was purchased by Schering-Plough, which Merck acquired in 2009. The allegations were originally included in several whistleblower lawsuits that were filed in federal courts in Massachusetts and Texas. Here is one of those lawsuits. And you can read the settlement documents here and here.

Meanwhile, Ranbaxy Laboratories agreed to pay nearly $40 million to resolve allegations that it violated the Medicaid Fraud Prevention Act in Texas, according to a filing with the Bombay Stock Exchange. The state attorney general had filed a lawsuit alleging the drug maker reported false or inflated prices and failed to disclose or concealed discounts to the state Medicaid program. Here is the settlement document.

A Ranbaxy spokesman sent us a note saying the “claims at issue related exclusively to the manner in which Ranbaxy has historically reported pricing data to Texas Medicaid for certain drugs. As has been widely reported, the state of Texas has brought nearly identical claims against virtually every major pharmaceutical manufacturer in the U.S.” He adds that the drug maker “believes it fully complied with all relevant laws,” but reached a settlement to avoid the distraction of litigation.

Ranbaxy had recently set aside $40 million for an unspecified charge, although news reports from India suggested the funds would be used to settle the Texas litigation. The settlement comes shortly after the U.S. Department of Justice asked the drug maker to provide documents on pricing data provided to Medicaid.

How might state Medicaid programs cope with a new and equally expensive hepatitis C treatment from Gilead Sciences? A new report released just as the FDA late last week approved Harvoni, which will cost $94,500 for a 12-week regimen, may offer some insights, at least according to a trade group for the state programs.

Sovaldi, you may recall, costs $1,000 a pill, or $84,000, for a 12-week regimen and the price tag has become a flash point in the national debate over the rising cost of prescription medicines. State Medicaid programs and pharmacy benefit managers call the drug a budget buster.

It is worth noting that the average price for Harvoni may be $80,000 to $83,000, depending upon the length of treatment. Why? Gilead priced its newest drug at $63,000 for an eight-week regimen and as many as 45% of patients may qualify for the shorter duration. The trade group argues Harvoni will be equally disruptive, because Harvoni is widely expected to displace Sovaldi as a treatment of choice.

For one, the newer treatment is a fixed-dose combination pill that does not require that patients simultaneously use other medicines. And many physicians have been ‘warehousing’ patients, a way of saying that doctors have been waiting for Harvoni to be approved before writing prescriptions. This suggests that Harvoni will be used to treat a larger patient population than Sovaldi.

So if Sovaldi is something of a shooting star, why should this new report matter? The results “portend what states will be doing with Harvoni,” says a spokesman for the trade group. “Harvoni is, essentially, son of Sovaldi. States are having a hard enough time with Sovaldi, so imagine what it’ll be like with Harvoni. We expect that all these state coverage decisions will be applied to Harvoni.”

What did the report find? Many state Medicaid programs have been moving to restrict access to Sovaldi. Right now, prior authorization, a process in which a payer will first review the prescription before automatically covering the cost, is required by 35 states for the treatment, according to the report distributed by the Medicaid Health Plans of America.

In addition, several states require patients to meet a set of clinical or related criteria for prior authorization, according to the report. And most, if not all, states that require prior authorization for Sovaldi also require patients to undergo a liver biopsy to determine the severity of their disease before treatment can begin.

The report offers a few examples of prior authorization requirements: Alaska requires patients to abstain from illicit drug use and alcohol for at least three months and undergo a verifying urine test; Illinois requires patients to meet 25 different criteria; and in West Virginia, only a board-certified infectious disease physician, gastroenterologist or hepatologist may prescribe Sovaldi.

And of 17 states that have placed Sovaldi on its so-called list of preferred drugs for which reimbursement is available, 14 states require prior authorization. And of those 14 states, seven also places limits on the frequency, quantity and duration of prescribing. Some states, such as Arizona, have a ‘once-in-a-lifetime rule that allows Medicaid patients only chance at treatment.

“Couple the higher price with the expanded patient population that an all-oral med is intended to grab and you’ve got a double whammy of unsustainability,” the trade group spokesman says.

A federal judge has ruled that Novartis must face a lawsuit in which the U.S. Department of Justice charged the drug maker with paying millions of dollars in kickbacks to physicians – including numerous lavish dinners and social events – in order to persuade them to prescribe its medicines.

The lawsuit, which was filed last year, alleges that Novartis caused Medicare and Medicaid to unnecessarily pay millions of dollars in reimbursements between 2002 and 2011 based on false insurance claims submitted for various drugs, including the Lotrel blood pressure treatment. Novartis, which denies the allegations, had filed a motion to have the lawsuit dismissed.

In the lawsuit, the feds maintain that Novartis boosted prescriptions by orchestrating “sham” speaker events, some of which were held at expensive restaurants, sports bars and fishing venues, where little or no direct connection to its drugs were discussed, according to court documents. And the drug maker allegedly paid various doctors to make the same presentation to the same group of doctors over a short period of time.

As an example, the lawsuit cites a July 2005 dinner at Smith & Wollensky in Washington, D.C., for $2,016 for three people, or $672 per person. There was also a May 2006 dinner at Nobu in New York, where a doctor was paid to speak, but only the physician, two of his friends – one of whom brought a girlfriend who was not a health care professional – and a Novartis sales reps had attended.

The lawsuit explains “in detail why the speaker events were shams and how they served as a vehicle for kickbacks,” U.S. District Court Judge Paul Gardephe wrote in a 90-page ruling. “Novartis has cited no case demonstrating that the government entities’ pleading of particular false claims is deficient.”

The decision means that Novartis business practices will be placed under a microscope. The lawsuit notes the drug maker four years ago paid $422.5 million in penalties and pleaded guilty to a misdemeanor to resolve criminal allegations for improperly promoting several medicines.

As part of the settlement, Novartis signed a five-year Corporate Integrity Agreement, which required establishing an internal compliance program and reporting violations, among other things. The lawsuit, however, suggests the drug maker may have violated the agreement.

The case is far from over, but there is a theoretical possibility that Novartis may face exclusion, which means the drug maker could be excluded from having contracts with federal health care programs. Of course, this can cause collateral damage if patients are unable to obtain certain medicines, making such a move highly unlikely.

Nonetheless, the feds may feel they have more leverage if any settlement talks take place while the case proceeds. It is also worth noting that the allegations undermine an argument offered by the pharmaceutical industry that recent settlements reflect older practices that have been ended.

A Novartis spokeswoman writes that the drug maker “disputes the allegations and will continue to vigorously defend itself in this litigation… Novartis is committed to high standards of ethical business conduct and has a comprehensive compliance program in place to help ensure we consistently act in a responsible manner.”

The government lawsuit stemmed from a whistleblower lawsuit filed three years ago by a former Novartis sales rep named Oswald Bilotta. The judge also ruled that Bilotta can pursue his own claims.

His attorney, Eric Young, wrote us to say that he is “pleased” with the ruling. “We think the decision is a great example of why the Sunshine Physician Payments Act is necessary.” He was referring to the Open Payments database launched yesterday that displays payments made by drug and device makers to physicians.

Manufacturing woes are not the only issue plaguing Ranbaxy Laboratories. The generic drug maker has been asked by the U.S. Department of Justice to provide documents on pricing data provided to Medicaid, according to a filing with the Bombay Stock Exchange.

Specifically, the filing says the feds sent a civil investigative demand, which Ranbaxy was quick to note is not an allegation of wrongdoing or demand for compensation. In any event, the drug maker indicated it would “fully cooperate with the civil investigation.”

The disclosure comes amid ongoing difficulties Ranbaxy faces with U.S. authorities. Last year, the drug maker paid a $500 million fine to U.S. authorities as part of a settlement that included pleading guilty to two charges of violating drug safety laws. Meanwhile, a consent decree stipulating manufacturing requirements remains in effect and the FDA has banned imports from four plants in India.

Meanwhile, Ranbaxy faces litigation in Texas, where the state attorney general two years ago filed a lawsuit charging the drug maker with violating the state Medicaid Fraud Prevention Act. The lawsuit alleges that Ranbaxy reported false or inflated prices and failed to disclose, or concealed discounts to the state Medicaid program.

Last month, Ranbaxy set aside about $40 million for an unspecified charge, although The Economic Times reported that set aside may have pertained to the Texas litigation, and that the settlement would cover both Medicaid and manufacturing disputes with the government. A spokesman for the Texas attorney general says the case is ongoing but declined further comment.